Price action forex strategy

The Inverted Hammer and the Shooting Star look absolutely the same too. Furthermore, they are the exact mirror image of the Hammer and the Hanging man. They have a lower body and a long bullish candle wick. The Inverted Hammer has the same function as the Hammer. When you get it at the end of a bearish trend, you expect the price to increase. At the same time, if you get a Shooting Star at the end of a bullish trend, you will likely see a decrease of the price.

Refer to the image below to see how this works:. After an increase of the Swissy a bearish Shooting Star appears on the chart. The next thing we see is a sharp decline of about 67 pips for 8 hours. Note that in order to discover candlestick patterns on your chart, you should actually use a Japanese candlestick chart configuration. If you are using a line chart or bar chart you will simply have no candles to analyze.

Chart patterns are specific formations and figures on the chart which give clues to potential trend continuations and reversals.

One of the unique features of chart patterns, is that by analyzing the pattern itself, we are able to set potential targets for the trade. In many cases, chart patterns have the potential to move a forex pair with an amount equal to the size of the formation. This is typically referred to as a measured move.

Now I am going to discuss some of the most reliable chart patterns:. The double top and the double bottom are reversal chart patterns, where at the end of a trend, the price creates two tops or bottoms approximately on the same level.

The bottom between the two tops is the signal level. When the price breaks through the signal level, we consider the formation as confirmed and we open a position accordingly.

1. An Introduction to Price Action Trading Strategies.
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3. Guide to Building Forex Price Action Trading Strategy;
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5. Why Does Price Action Work?.
6. Price Action Trading – Most Adaptable Forex Trading Method?

Then we follow the market until we reach a target equal to the size of the formation. Take a look at the image below:. The blue lines show the double top formation. The orange horizontal line is the signal line, which triggers our short position. The black lines show the size of the formation, which is the amount of decrease we pursue. Notice that the signal line plays the role of a support since the price conforms to that level a bit before the creation of the double top.

Also, when the price breaks the signal line as a support, it tests it immediately as a resistance afterwards. This gives additional reliability to our short position. The double bottom formation looks the same, but upside down. It could appear at the end of a bearish trend and could reverse the price movement the same way as the double top. Thus, it should be traded the exact same way as a double top formation, but in the opposite direction. The head and shoulders is a reversal chart pattern, and is one of the most reliable chart patterns to trade.

We have a head and shoulders formation when the price creates three spikes in this order — one lower, one higher and another lower on the approximate same level as the first one. Traders call this formation head and shoulders because, you guessed it, it really looks like a head and shoulders. Head and shoulders typically appear at the end of a bullish trend. At the same time, inverted head and shoulders typically appear at the end of a bearish trend.

The two formations look the same, but inverted — the same way as with the double top and the double bottom formations. When you get a head and shoulders formation , you should set up your signal line, which is also called the neck line. The neck line is the straight line, which connects the two bottoms creating the head between the two shoulders. When the price breaks the neck line, you would open a position, and target a price movement equal to the size of the formation. Please refer to the following example for a head and shoulders example:.

The blue lines on the chart draw a head and shoulders formation. The orange line is the signal line of the formation — the neck line. The black lines represent the size of the formation and at the same time, the potential target we are pursuing. We go short whenever the price breaks the neck line and we aim for the target level. The inverted head and shoulder formation works the same way, but could appear at the end of a bearish trend, reversing it into a bullish direction. We have a rising wedge when the price is closing with higher tops and even higher bottoms. And we have a falling wedge when the price closes with lower bottoms and even lower tops.

The rising wedge has the same potential as the falling wedge, but in the opposite direction. Also the two formations are a mirror image to each other. The rising and the falling wedge can be trend reversals or trend confirmations depending on where they appear in relation to the overall trend. When you have a rising wedge in a bullish trend, this typically suggests that price might reverse its direction.

At the same time, if you spot a rising wedge during a downtrend, it has a trend confirmation character.

If you see a falling wedge on a bearish trend, this means the trend could reverse its direction. At the same time, if you notice a falling wedge during a bullish trend, then the formation has a trend confirmation character. If this sounds confusing to you, just remember that the rising wedge typically calls for an upcoming bearish movement, while the falling wedge indicates eventual price increase. Similar to the other chart patterns we discussed, the wedge has the potential to push the price toward a movement equal to the size of the wedge.

The image below will show you how to trade a wedge. Since it is after a decrease, we know that the price might increase after the wedge. Thus, we buy after the price breaks the wedge in a bullish direction. Note that in a wedge, the signal line is the level, where the price is expected to break through. Now imagine that we get this wedge after a price increase. In this case, the same falling wedge will act as a trend continuation pattern.

The same strategy applies for rising wedges. If a rising wedge is formed after a price increase, then we have a reversal pattern and we expect to see a price drop. If a rising wedge occurs after a price decrease, then the wedge acts as a correction and the expected drop has a continuation character.

The trading patterns we discussed above are fractal in nature, which means that they could appear on any timeframe on any chart. As with any type of analysis, you should always be prepared for different trading situations. Also, some of the patterns could appear at the same time. You can always confirm a trend with a continuation chart pattern and an additional candle pattern, which can give you additional confirmation when entering the market. I believe now you should have a clearer picture of how to trade price action using different trading patterns.

Price Action Trading is the purest, simplest way to trade the markets. We base our trading assumptions solely on the recent price movement and we try to predict where the price might go based on its previous behavior. Download the short printable PDF version summarizing the key points of this lesson…. This is what we do. The blue line above shows the 1. This is one cross that travels a lot. Therefore, deviations from a static point like a round number are bigger. In plain English, price swings aggressively on nothing at all. The Forex price action was bearish.

A strong downtrend saw the pair breaking the 1.

Keep in mind this is the daily chart. From the moment the psychological round number broke, price action around it tells everything about future prices. As such, support turned into resistance. Moreover, part of price action trading, a series of three lower-highs forms around it. While not marked on the chart above, a bearish symmetrical triangle formed prior.

Price Action Strategies

Coming back to the head and shoulders pattern, price action trading should focus on the long side now. Any price action Forex trading strategy must consider the time frame. Remember one of the previous statements? Information on the left side of the chart is free information. Price action sends the market there. A perfect entry for the perfect trade. A proper stop loss must be at the lows. And, a proper price action Forex strategy needs a good risk-reward ratio.